Bank of Japan sets 2 percent inflation target

Bowing to government pressure, Japan's central bank Tuesday pledged more aggressive action to boost the economy, including setting a 2 percent inflation target.

The Bank of Japan said it would conduct "open-ended" asset purchases to help achieve the goal of breaking out of a long spell of deflation.

Prime Minister Shinzo Abe had urged the central bank to ease monetary policy further to help the recession-struck economy escape from years of falling prices.

Whether the effort will succeed remains to be seen: the central bank has not achieved even its 1 percent inflation target, with price increases hovering below 0.5 percent for the past two years despite surges in energy costs.

The central bank described its inflation goal as a "price stability target."

""Under the price stability target, the bank will pursue monetary easing and aim to achieve this target at the earliest possible time," it said.

But it said it would also "ascertain whether there is any significant risk to the sustainability of economic growth, including from the accumulation of financial imbalances."

Among the risks are a ballooning public debt, already well over twice the size of Japan's gross domestic product.

Abe's government is seeking to spur growth both through heavy government spending on public works and other projects and through monetary easing. The announcement by the central bank Tuesday was in line with expectations.

The government was determined that the central bank set a 2 percent inflation target, trade minister Toshimitsu Motegi told reporters on Monday.

"We want a clear inflation target to aim for," Motegi said. "Other countries have inflation targets, and it's not just 1 percent. They are all at least 2 percent," he said.

Motegi said the monetary easing, which has involved tens of trillions of yen (hundreds of billions of dollars) in asset purchases and years of near-zero interest rates, so far has been "inadequate."

The Abe government is expected to nominate as Bank of Japan governor an expert known to favor its policies when the term of the current governor, Masaaki Shirakawa, ends this spring.

However, Motegi rejected accusations that the government's demands are meant to erode the central bank's independent status.

"We are not doing this to gang up and pick on Mr. Shirakawa," he said. But he added that "the policy of aiming to escape deflation will not change, not today, not tomorrow or the day after tomorrow."

Critics of the government's strategy of pushing for more inflation argue that it will do little to stimulate real demand in the economy if it pushes up prices without accompanying gains in purchasing power.